An Insight: The UK recession in historical perspective

UK gross domestic product is predicted to grow 1.1% in 2011, down from the 1.5% forecast in the IMF's previous World Economic Outlook report in June.

The growth forecast for 2012 has been slashed from 2.3% to 1.6%.

In order to interpret the current recession we need to analyse the earlier recessionary periods.

Interwar period (1918-1939)

UK was a dominant player in the international gold-standard system during the 1870-1914 period. The end of the first world war was followed by an international restocking boom which went into reverse swiftly. This impacted the UK exports and hence the GDP, leading to high levels of unemployment.

The recession was short lived and the recovery was weaker than that experienced by USA and Germany. 

Great Depression - 1929

During the Great Depression, the UK exports declined by 32%, but the GDP fell only by 4.8% which was less severe than the contractions faced by USA and Germany. The decline in world demand resulted in lower prices of primary products and this boosted the consumerism in the UK which was a major support to the GDP, however UK exports lost their competitiveness in the international markets resulting in high levels of unemployment

Recovery Again!

Sterling was departed from the gold standard and was depreciated to competitive levels. The BoE adopted a more lenient monetary policy which resulted in increase public spending and investments in house building. The exports, however remained less in demand due to recession in the US.  

Post-war recessions

After the second world war, consumerism played a greater role than investments and exports in running the business cycle.

1970s

This was a completely new era. The fiscal and monetary policies adopted were expansionary in nature and the banking system was deregulated. However, the oil crisis in 1973 resulted in cost-push inflation which pushed the economy into recession.

1980s

The 1979 or second oil crisis caused due to the Iranian revolution. UK experienced an appreciation in the sterling due to it becoming an oil producer. This again made UK less competitive in international markets resulting in high levels of unemployment (due to decline in productivity) and inflation caused by high oil prices. On top of all this, the fiscal policy was tightened by the Thatcher government.

1990s

Deregulation of financial institutions and consumer optimism led to growth. The consumer optimism was depleted due to the tightening of the monetary policy to support the sterling to remain in the European ERM (Exchange Rate Mechanism). 

Recovery was possible again when the sterling was withdrawn from the ERM. This resulted in the fall of interest rates which again led to consumer and business optimism. 

Current Recession

The economic growth achieved prior to 2007/2008 was mainly due to favorable demand side policies. This resulted in over-heating of the economy. The debt to GDP ratio increased rapidly, amid consistent balance of payments deficit. Credit was being easily provided and the financial institutions were not exercising self-regulation. Savings were diminishing underpinning the consumption and investment. Huge budgets were being allocated to non-productive segments, such as defense. It has to be noted, the monetary policies yet remain expansionary in nature.


Conclusion
-Depreciate of sterling to achieve competitiveness and export led growth
-Cut public debt and set priorities in budget and its allocation
-UK has good spending in Education and Health care as a percentage of GDP. It can be anticipated that the productive capacity of the UK will grow in the long run.
-Switch focus from demand management to supply-side policies, or rather both (hand in hand).


Note: The above views are personal and can be debated upon due to them being subjective and judgmental.